EuroFinance

The collapse of Greensill Capital last month has left treasurers questioning the structures of SCF programmes operated by specialist lenders.

Greensill filed for insolvency protection on 8 March after Credit Suisse froze funds invested in the SCF lender, due to Tokyo Marine credit insurance policies that were unable to be renewed due to underlying risks.

The rapid expansion of Greensill, injected with $800 million of Softbank’s Vision Fund in 2019, saw the firm extend SCF or ‘reverse factoring’ globally.

Reverse factoring

In reverse factoring a lender will pay a corporate client’s suppliers early at a discounted rate, and hold the receivables until the buyer makes the payment. With Greensill, receivables were packaged into a supply chain fund by Credit Suisse. Household name companies listed in the fund include Vodafone, Kellogg, Astra Zeneca, Nokia, General Mills and Shop Direct – all declined or did not respond to requests for comments.

Technology firm Taulia, which worked exclusively with Greensill until 2019 and has clients in the Credit Suisse SCF fund, has now set up a $6 billion multi-funded facility with a panel of lenders including JP Morgan and UniCredit to support suppliers exposed to the collapsed lender. JP Morgan which announced a strategic alliance with Taulia last year, and together with Ping An and others invested $60 million in the firm, contributed two thirds of the $6 billion rescue facility, according to sources.

According to Bob Glotfelty, Taulia’s VP for Growth, its smooth response to Greensill’s collapse has proven the value of a multi-funder approach. ‘It’s really the proof point of the multi-funder model. If a bank or a financial institution is no longer available, we are able to quickly move to other sources’.

Whilst insurers had concerns of the credit quality of the SCF funds, Glotfelty commented that the creditworthiness of Taulia’s companies are stable. ‘We work with companies with one billion in revenue and higher, so they are reputable organisations with strong credit ratings’.

A treasury leader at a multinational technology company, who declined to be named, was exposed to Greensill through Taulia’s platform. The treasurer told EuroFinance that they had to accept Greensill funding as a condition of joining the platform, even though Greensill was not on its approved panel of lenders: ‘We got affected, but we were able to react very quickly and go back to stable known bank relationships that we have. We don’t like to work with counterparties that we don’t know, and have not fully vetted’.

SCF and opaque SPVs

The opaque structures in SCF fund portfolios, which can contain assets of varying credit quality, is also a concern to treasurers, especially when they are packaged together. Even bank-led trade finance securitisations have met a lukewarm response in the past, and Greensill’s dependence on the Credit Suisse funds is seen as vindication by such sceptics.

‘Fintechs introduce special purpose vehicles (SPVs) structures and clients don’t have much visibility to what exactly goes on. Through credit enhancement the rating of the portfolio can be quite high, but underneath some names may not be that great and they may be inherent risks’, comments the multinational treasury leader.

Vincent Almering, Group Treasurer of global diary trader Interfood, which participates as a supplier in multinational SCF programmes, argues that debt offered by specialist lenders can be opaque: ‘some sell non-transparent products, and usually repackage large groups of receivables in order to increase the credit rating and fold it through banking firms and private investors’.

Whilst regulators need to be more vigilant, investors need greater due diligence says Almering. ‘If a company offered to take receivables off my books, I would ask questions. If it’s too cheap credit, there’s something fishy about it. So do your due diligence, and KYC your funding partners’.

Funding and Investors

An attractive feature of SCF is that suppliers are able to obtain credit on the rating of the buyer, which is often stronger, and usually at cheaper rates than suppliers can obtain through their own bank financing.

For the multinational treasury leader, the Greensill events have put a break on new SCF partnerships: ‘Now, we’re not going to sign up for these structures, which are not transparent with regards to funding, we prefer our relationship banks that we know and trust’.

Investors are likely to be more cautious in the light of Greensill, points out Patrick Kunz, Interim Treasurer at Netherlands based CarNext.com and Managing Director of Pecunia Treasury & Finance B.V.

‘Investors, like pension funds, are going to be more critical and more critical on what is the risk profile of the investment in packaged SCF loans’, Kunz cautions.

Kunz argues that low interest rates have been a driver of risk: ‘Trust has been damaged and is important in the securitisation market. It’s too easy to think, it’s a low risk portfolio with a higher return versus negative interest rates in the market’.

Fintechs vs Banks

Companies are now more likely to opt for stable banking partners than new specialist fintech style arrangements, say treasurers.

‘When fintechs try to become banks, that’s where the problem happens because they don’t have the structure to really roll global supply chain finance programmes. Recently there has been a trend to go with fintechs instead of bank programmes, that I think companies will probably want to revisit, and rethink’ comments the multinational treasurer.

Fintechs offering SCF management platforms can also be in partnerships with funders but this is not always the optimal arrangement for the treasurer. The concern is all the more acute since the fintech might not be aware of changes at the funder such as Greensill’s drift away from its core SCF proposition into areas such as funding of non-existent receivables.

Kunz points out that Greensill was overexposed to one client, Liberty Steel: ‘A bank would never do that. Where one client has exposure 10% to one supplier, lenders typically say you will not get credit for further exposure. Greensill had 40- 50% on one client, that’s a real no go in supply chain finance. This basically means that the risk profile is much higher as the correlation is high, we see the results now’.

Taulia’s Glotfelty is confident banks and fintechs can work in harmony: ‘We believe there’s an opportunity to have the best of both worlds. A platform provided by a technology company, and the capital provided by banks will ensure treasurers have access to both efficient processes and stable funding’.

Future SCF market

SCF may become more expensive in the wake of Greensill.

‘Competitors are still going to offer SCF, but they’re going to have a harder time on the back end to refinance themselves and their refinancing costs are going to increase’, claims Kunz.

And the reputational hit may discourage suppliers that view SCF as a form of corporate payday lending. Suppliers typically bear the cost of the discounting, as Almering points out: ‘I don’t think it’s a really fair product, because large multinationals offering SCF programs increase payment terms at the same time, limiting the benefit of discounting receivables’.

On the purchasing side, multinational treasurers remain positive on the future of the SCF market, in the view of an investment grade European corporate treasurer, ‘this as an opportunity for SCF to come out even stronger once Greensill has been resolved… this is a healthy, attractive business – in the end we hope that these events will contribute to a market place where conditions are more transparent’.

Download the Supply Chain Finance special report, a compilation of key articles from the past year documenting SCF’s rise and subsequent growing pains.

Download now